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The Federal Reserve announced on Wednesday that it would keep interest rates unchanged after aggressively raising them over the past year to fight high inflation. While hitting pause on rate hikes for now, the Fed signaled that it may implement one more small increase before year-end while it assesses the impact of existing policy tightening on the economy.

In its latest policy statement, the Fed held its benchmark federal funds rate steady in a range of 5.25–5.5%, the highest level since early 2008. The central bank has lifted rates five times this year, including three consecutive 0.75 percentage point hikes in June, July and September. Those were the largest back-to-back-to-back increases since the 1980s.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” the policy-setting Federal Open Market Committee said in a statement. However, it noted that “recent indicators point to modest growth in spending and production.”

The Fed’s updated economic projections show most officials expect to raise rates again to a range of 5.25–5.5% by the end of 2022, implying one more quarter-point hike likely in December. The projections also indicate rates will rise to 5.1% in 2023 and 2.9% in 2024, a higher peak and longer period at restrictive levels than previously forecasted.

Fed Chair Jerome Powell said in a press conference that the central bank still has “some ways to go” in tightening policy but does not want to overtighten given economic uncertainties. He indicated the Fed may scale back rate hikes as it approaches a sufficiently restrictive stance.

The Fed’s pivot to a less aggressive tightening path gives it time to evaluate how the economy is handling higher borrowing costs before committed to further hikes. Aggressive Fed policy has pushed mortgage rates above 7% for the first time in two decades, caused the housing market to slow sharply and put stress on the stock market.

“The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments,” the Fed statement said.

Rapid Rate Hikes Over Past Year to Curb High Inflation

The Fed’s decision to stand pat on rates in September follows an intense period of policy tightening over the last 12 months aimed at cooling demand and reducing price pressures in the economy. Before this year, the Fed slashed rates to near-zero in March 2020 while battling the COVID-19 recession.

Starting in March 2022, the central bank began aggressively raising its benchmark rate, taking the funds rate from a range of 0–0.25% to over 5% by September. The rapid fire rate increases were the fastest pace of monetary policy tightening since the early 1980s.

The Fed’s goal has been to reduce stubbornly high inflation that surged to a 40-year high of 9.1% in June before moderating slightly to 8.3% in August, still well above the Fed’s 2% target. Russia’s war in Ukraine, lingering supply chain snarls, robust consumer demand and a red-hot job market have contributed to rising price pressures.

While Americans have felt the pinch of pricier food, gas, rent and other living costs, the economy has so far remained resilient amid rate hikes meant to engineer a slowdown. Unemployment was 3.7% in August as employers added over 185,000 jobs.

“Inflation has eased somewhat but remains elevated,” Powell said, noting the Fed will need to see a series of declining monthly inflation readings before declaring victory.

One More Rate Hike Likely But Further Increases Uncertain

The latest Fed projections point to one additional quarter-point rate increase by December, followed by an extended period holding at a higher peak rate through next year and into 2024 to ensure inflation continues cooling.

However, Powell stressed that the exact path of rates remains uncertain and dependent on incoming economic data. He said the central bank could ultimately raise rates higher than projected if inflation persists and cut rates more quickly if price pressures fade faster than expected.

For now, the Fed feels hitting the pause button allows it to properly assess how monetary policy is impacting jobs, prices, consumer spending and business investment. More rate hikes risk tipping the economy into recession while moving too slowly could allow inflation to become entrenched.

Powell reiterated the Fed will continue to make decisions meeting by meeting based on the evolving outlook. He said reducing inflation remains the central bank’s overarching focus.

“We will stay the course until the job is done,” Powell vowed.

Impact on Consumers and Businesses

The Fed’s extreme policy tightening over the past year has significantly raised the cost of borrowing for households and businesses. Credit card rates have climbed, auto financing and home equity lines of credit are pricier and corporations face steeper interest expenses.

Mortgage rates have surged above 7% on average, more than double levels below 3% at the start of 2022. The housing sector has been directly impacted by higher rates, with sales of existing homes falling for eight straight months through August.

For consumers, reckless spending could become costly with more Fed hikes possible and savings account yields are finally rising thanks to higher interest rates. Investors face increased market volatility and falling bond prices as rates rise.

Overall, the Fed’s determination to lower inflation through sizable rate hikes threatens to reduce economic output and job gains in coming months. The U.S. economy could face recession risks in 2023 after the fastest monetary policy tightening in 40 years.

“At some point, the pace of increases will slow as the Fed approaches peak rates for this cycle,” said Ryan Sweet, chief economist at Oxford Economics. “The Fed’s focus is on engineering a soft landing, though the risk of a hard landing has increased.”

Conclusion

The Fed’s decision in September to hold rates steady gives it breathing room to evaluate the impacts of the sharpest tightening campaign since the Volcker era in the early 1980s. With inflation starting to moderate but still high amid resilient economic growth, one more rate hike this year seems likely.

However, the path of future rate increases is data dependent. The Fed is striving to tame inflation without severely damaging employment and growth. How the economy performs as borrowing costs rise will dictate upcoming policy moves.

Consumers and businesses must prepare for further rate impacts, though the most extreme Fed tightening appears to be in the past. We will continue to monitor the Federal Reserve’s evolving response to the inflation fight and share key insights with our valued readers. Please check back regularly for the latest economic updates and policy analysis from our expert team.